Leaving ESOPs aside for the moment, is it prudent for company stock to be an investment option in a defined contribution (DC) plan? To me ... well, actually it doesn't matter what I think. If I were working for a company that had company stock as an investment option in a DC plan, and I were considering that investment, then my opinion would matter, but only to me.
For the rest of the plan participants in the US, whether or not such an investment option is prudent (we're talking about the option to invest here, not the investment itself) is a subject of much debate, and of much litigation. If you follow DC litigation at all, then you know about the myriad of stock-drop lawsuits. What is a stock-drop lawsuit? It is litigation brought by plan participants who make the claim that such an investment option should have been removed from the DC plan prior to a significant drop in the value of company stock. The current Department of Labor (DOL) has written amicus curiae (friend of the court) briefs saying, in essence, that plan sponsors should be held to the same standard of prudence with respect to company stock as an investment option as they would be with any other option. The DOL says that not doing so applies a more lenient judiciary-created standard of prudence to the company stock option than that created by ERISA.
The courts have disagreed. They have taken that far more lenient reading of ERISA with respect to company stock, in essence saying that since ERISA contemplates investments in company stock, there is a rebuttable presumption that such an investment option is prudent. This is often known as the "Moench presumption", as it was first espoused in Moench v Robertson.
While the courts have largely taken this as the law of the land, many ERISA litigators and legal scholars have been amazed. In fact, the Moench presumption has been so strong that 1) decreases in stock price of more than 80%, company-wide financial distress, accounting violations, ill-fated mergers, and reverse stock splits are not sufficient evidence to rebut the Moench presumption.
Wow!
This observer could see someone taking that to mean that having company stock as an investment option might even satisfy the judiciary standard for ERISA prudence if the Committee who selected the option knew that the company was about to file for protection under Chapter 7 of the Federal Bankruptcy Code. Surely, committees need some protection, but Moench has largely been the law of the land for 15 or more years and it seems an awfully difficult presumption to rebut.
As always, this author is not an attorney and does not practice law. Anyone seeking legal advice on this, or any other legal matter, should seek appropriate legal counsel.
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Showing posts with label Stock Drop. Show all posts
Showing posts with label Stock Drop. Show all posts
Tuesday, March 22, 2011
Tuesday, January 11, 2011
Stock Drop Case to Move Forward
Last week, I wrote about "ignorance risk" http://johnhlowell.blogspot.com/2011/01/how-much-weight-do-you-give-to.html Earlier, I wrote about being a singles hitter rather than swinging for the fences and hitting some home runs and striking out a bunch http://johnhlowell.blogspot.com/2010/12/two-key-words.html
In Veera v. Ambac Plan Administrative Committee, the plan committee may have struck out.
For several years now, participants have been suing plan sponsors in so-called stock drop cases, so named because the participants claimed that the sponsor violated their prudence requirement under ERISA by continuing to allow investment in company stock, even when the risk of precipitous loss had increased. In Ambac, the plaintiffs charge that the company significantly changed its business practices and strategies taking on a much higher risk profile between 2004 and 2007. During that period of time, the value of the company stock dropped from $96 to $1.
In most cases of this nature, judges have ruled that companies/administrators should be given the presumption that they acted prudently in stock drop cases. In this case, the judge has failed to do so.
Now, this doesn't mean that the plaintiffs have prevailed, or even will prevail, it simply means that the judge is allowing the case to move forward, on a more plaintiff favorable basis than was probably expected. While it's often a matter for discussion, the bar has been set very high for plaintiffs in ERISA prudence cases. We'll monitor this one to see where it goes.
In Veera v. Ambac Plan Administrative Committee, the plan committee may have struck out.
For several years now, participants have been suing plan sponsors in so-called stock drop cases, so named because the participants claimed that the sponsor violated their prudence requirement under ERISA by continuing to allow investment in company stock, even when the risk of precipitous loss had increased. In Ambac, the plaintiffs charge that the company significantly changed its business practices and strategies taking on a much higher risk profile between 2004 and 2007. During that period of time, the value of the company stock dropped from $96 to $1.
In most cases of this nature, judges have ruled that companies/administrators should be given the presumption that they acted prudently in stock drop cases. In this case, the judge has failed to do so.
Now, this doesn't mean that the plaintiffs have prevailed, or even will prevail, it simply means that the judge is allowing the case to move forward, on a more plaintiff favorable basis than was probably expected. While it's often a matter for discussion, the bar has been set very high for plaintiffs in ERISA prudence cases. We'll monitor this one to see where it goes.
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